PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 19 J OB O RDER C OST A CCOUNTING

Process Costing Job Costing  Used for production of large, unique, or high-cost items.  Built to order rather than mass produced.  Many costs can be directly traced to each job.  Used for production of large, unique, or high-cost items.  Built to order rather than mass produced.  Many costs can be directly traced to each job. C OST A CCOUNTING S YSTEMS Chapter 20 C 1

Process Costing Job Costing Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms Chapter 20 J OB O RDER P RODUCTION C 1

Receive order from customer. Predict cost to complete job. Negotiate a sales price and decide whether to pursue the job. Schedule production of the job. E VENTS IN J OB O RDER C OSTING C 1

Goods in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Allocate J OB O RDER P RODUCTION A CTIVITIES C 1

J OB O RDER C OST D OCUMENTS job cost sheet The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate C 2

J OB C OST S HEET C 2

J OB C OST S HEET Let’s see one A materials requisition is used to authorize the use of materials on a job. C 2

M ATERIALS R EQUISITION C. Luther M. Bateman C. Luther P 1

C. Luther M. Bateman C. Luther M ATERIALS R EQUISITION Proper authorization Cost of material is charged to Job B15. P 1

C. Luther M. Bateman C. Luther M ATERIALS R EQUISITION Type and quantity of material charged to Job B15. Pre-printed, sequentially numbered form P 1

C. Luther M. Bateman C. Luther M ATERIALS R EQUISITION The materials requisition form also serves as the source document for recording material usage in the accounting records. P 1

M ATERIALS L EDGER C ARD P 1

J OB C OST S HEET P 1

J OB C OST S HEET Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee. Let’s see one P 2

L ABOR T IME T ICKET C. Luther P 2

J OB C OST S HEET P 2

J OB C OST S HEET Allocate manufacturing overhead to jobs using a predetermined overhead rate Let’s do it P 3

J OB C OST S HEET P 3

Road Warriors uses a predetermined overhead rate (POHR) based on direct labor cost to apply overhead to jobs. Estimated total manufacturing overhead cost for the coming period Estimated total direct labor costs for the coming period POHR = POHR = = 160% of direct labor $ $200,000 $125,000 P REDETERMINED O VERHEAD R ATE P 3

J OB O RDER C OST F LOWS AND R EPORTS Let’s summarize the document flow we have been discussing in a job-order costing system.

Materials Ledger Cards Materials Requisition Direct materials The materials requisition indicates the cost of direct materials to charge to jobs and the cost of indirect materials to charge to overhead. Indirect materials Job Cost Sheets Factory Overhead Account Material Cost Flows and Documents P 1

Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead. Job Cost Sheets Factory Overhead Account Job Cost Sheets Direct Labor Indirect Labor Employee Time Ticket Labor Cost Flows and Documents P 2

Summary of Cost Flows Let’s examine the cost flows in a job order system. We will use T-accounts and start with materials.

Material Purchases Direct Material Actual Overhead Costs Indirect Material Dr Cr Summary of Cost Flows P 1

Incurred Direct Material Actual Applied factory factory overhead overhead = / an adjustment is needed. We will look at how to accomplish this later. When Direct Labor Indirect Labor Actual Overhead Costs Overhead Overhead Applied to Work in Process Dr Cr Summary of Cost Flows P 2 P 3

Direct Material Direct Labor Overhead Cost of Goods Mfd. Cost of Goods Sold Dr Cr Summary of Cost Flows P 3

We multiply the POHR times the number of activity units (direct labor cost for Road Warriors) incurred for the job. Tell me again how we use the POHR to assign overhead to jobs. O VERHEAD A PPLICATION P 4

O VERHEAD A PPLICATION Overhead is not incurred uniformly during the year. Actual overhead rate might vary from month to month. Predetermined rate makes it possible to estimate job costs sooner. Reasons for using a POHR (predetermined overhead rate) P 4

The result will be either underapplied or overapplied overhead and we will adjust Cost of Goods Sold at the end of the period. Here, let me show you. The POHR is based on estimates. What happens if actual results differ from the estimates? A DJUSTMENT OF O VERAPPLIED OR U NDERAPPLIED O VERHEAD P 4

Overhead is overapplied. Overhead applied to Work in Process (POHR × Activity) Actual overhead costs incurred A DJUSTMENT OF O VERAPPLIED OR U NDERAPPLIED O VERHEAD P 4

Overhead is underapplied. Actual overhead costs incurred Overhead applied to Work in Process (POHR × Activity) A DJUSTMENT OF O VERAPPLIED OR U NDERAPPLIED O VERHEAD P 4

Adjusting Cost of Goods Sold for underapplied or overapplied overhead A DJUSTMENT OF O VERAPPLIED OR U NDERAPPLIED O VERHEAD P 4

G LOBAL V IEW Expensive European sports cars are often built according to individual customer specifications. Customers place orders for their dream cars, and then each car is built to order and shipped to the customer.

P RICING FOR S ERVICES Pricing for services is based on direct labor. Any material costs are usually incidental and are a part of overhead. Acme Consulting prepared the following bid for a job that will require a total of 1,000 hours of direct labor. A 1

Let’s look at summary accounting journal entries for the job order cost system at Road Warriors. The dollar amounts are from Exhibit in your textbook. E NTRIES FOR J OB O RDER P RODUCTION C OSTS

E NTRIES FOR J OB O RDER P RODUCTION C OSTS P 1

E NTRIES FOR J OB O RDER P RODUCTION C OSTS P 1 P 2

E NTRIES FOR J OB O RDER P RODUCTION C OSTS P 2

E NTRIES FOR J OB O RDER P RODUCTION C OSTS P 3

E NTRIES FOR J OB O RDER P RODUCTION C OSTS P 3

E ND OF C HAPTER 19